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Tuesday, June 30, 2009

Income Tax Deduction on house rent paid

This article outlines some instances when the rent paid is allowed as a deduction while arriving at total taxable income

An individual is allowed a deduction on the rent he pays for the house occupied by him. The relevant provisions are contained under Section 80GG of the Income Tax Act. In computing the total income of an assessee, he is allowed a deduction on the expenditure incurred towards payment of rent for any furnished or unfurnished accommodation occupied by him. The residence should be rented for his own use only.

In order to avail this deduction, the assessee should be self-employed or a salaried employee. The deduction is not restricted to salaried employees only as is the case with house rent allowance (HRA). Further, he should not have received a HRA at any time during the previous year. In case he had received a HRA during any part of the previous year, the deduction under Section 80GG is not available to him. The assessee should file a declaration in Form 10BA furnishing the expenditure incurred by him towards the payment of rent.

However, the Income Tax Department may prescribe other conditions or limitations, regarding the area or place in which the accommodation is situated, after taking into account other relevant considerations.

Normally, most salaried employees get HRA and accordingly the deduction on rent paid is governed by the provisions related to HRA under the Income Tax Act. The biggest advantage of this deduction is that it is available even to self-employed people who stay in rented accommodation.

Amount of deduction is limited to the least of these amounts:

• Rs 2,000 per month

• 25 percent of total income for the year (excluding long-term capital gains and some specified incomes, before allowing deduction for any expenditure under this Section)

• Expenditure incurred in excess of 10 percent of total income towards rent (excluding long-term capital gains and some specified incomes, before allowing deduction for any expenditure under this Section)

The deduction will not be available to an assessee in case a residential accommodation is owned by him, his spouse or minor child, at the place where he ordinarily resides or carries on his business. Also, the deduction will not be available to an assessee in case a residential accommodation is owned by him at any other place, provided this accommodation is occupied by the assessee, and the concession available for a self-occupied house has been claimed by him under Section 23 for this property. In such a case, no deduction will be allowed on the rent paid, even if the person does not own any residential accommodation at the place where he ordinarily resides or carries on his business.

These provisions enable self-employed people and others not in receipt of HRA to claim deduction on the rental expenses incurred.

Monday, June 29, 2009

A-Z of Cutting Costs

A ir travel... don’t bother to fasten those seat belts. Flying has become too much of a luxury even for the well-heeled. For the rest, it’s good old Laloo rail. Before complaining about those stinking toilets, remind yourself you’re saving on astronomical airfares. Corporate honchos aren’t on this track just yet but they’ve been forced to downgrade from the luxuries of business class to humble economy. Just last month, a leading Indian bank asked its entire investment banking division to stop travelling business class. Babus, too, have to look for the cheapest flight deals after the Centre’s warning that leave travel allowance (LTA) isn’t a ticket to splurge.

B ollywood’s shouting ‘cut, cut, cut.’ The stars have cut fees and producers their budgets. Actor Sanjay Dutt, who was charging Rs 15 crore, is back to a more affordable Rs 4-5 crore. Sanjay Dutt Productions CEO Dharam Oberoi explained that the actor thought it would be “unfair to hike his prices at a time when the industry is struggling with recession”. John Abraham has reportedly cut his fee by 60% for his next film and director Pooja Bhatt has been asked by T-Series to trim the budget of her new film Kajra Re.

C ar drop has become drop car as some I-T companies in Hyderabad and Bangalore introduce buses to ferry workers around. Senior executives can’t hire luxury taxis and have to make do with Indicas.

D ivorce? Nah, it’s not worth it if your spouse doesn’t have any assets left to split. So discord or not, most couples are opting to stick it out, say marriage counsellors.

E xpats are getting the heave-ho. In lean times, most companies are baulking at the thought of huge wage payouts. Jet Airways has already let go many foreign pilots. MNCs such as Procter & Gamble and Marriot have also decided to cut down on expat assignments. “An expat costs three to five times more than a local,” says a senior official of an MNC.

F ood bills have shrunk as people share appetizers and skip dessert. The good news is that happy hours at bars have been extended.

G uest entertainment is out and company guesthouses are in. Don’t even think of wining and dining those clients and leaving the company to pick up the tab. Kiss goodbye to five-star hotels as companies set up guesthouses of their own.

H otel freebies have got the axe. So be prepared for no welcome drink, complimentary slippers, or mint on the pillow. Even the quality of toiletries is going to suffer.

I n-house entertainment budgets, which ranged between Rs 50 lakh and Rs 5 crore, have nose-dived, so family days and picnics are out. Serious times are here, especially for fun officers as many I-T companies have either retrenched or redeployed these interestingly titled members of staff.

J unk the snacks. Chai-nashta is now just chai as the free pizzas and sandwiches have disappeared at most BPOs. In a lighter vein, it’s good not just for the pocket but for waistlines.

K ids may have to wait. Worried about whether they will be able to provide for their children, some couples in the US have put off plans to start a family. Economists consider baby booms or busts a reliable indicator of a nation’s fortunes.

L unch boxes are enjoying an unlikely renaissance as the cash crunch bites. In the good times, packed lunches had become passe for executives, who found it easier to grab a bite near the office. But now, it’s tiffin time again. Good news for the dabbawalas!

M arriages are considered recession-proof in India but many couples are altering their route to the altar. Guest lists have been pruned and seven-course buffets are no longer the order of the day. Financial lows mean no high spirits as mocktails replace cocktails.

N o wasting power. Firms have announced curbs on air-conditioning and lights. That should make the green lobby happy.

O ff-site meetings are out. Deutsche Bank and Credit Suisse recently asked bankers to forgo meetings at swanky hotels and gather warmly around the office instead. That’s bargain bonding.

P arty’s over. What can be a bigger sign of hard times than parties being cancelled? Here, New Year and Christmas bashes are going to be low-key. And in Silicon Valley, even Internet giant Google Inc, known for throwing the most extravagant holiday season parties complete with sushi buffets and burlesque dancers, has decided to scale back celebrations.

Q uantum cuts in perks and salaries. Get ready to forgo your LTA and reimbursements for petrol and cellphones.

R omance and recession certainly don't go hand in hand. Expensive dates are out with lovebirds making do with a movie at the neighbourhood multiplex or worse still, a walk in the park.

S abbaticals are the less-painful option for companies that don’t want to retrench. Infosys is one of the companies giving employees this option. Those who’ve been with it for at least two years can take a sabbatical to work with an NGO. They'll be paid 50% of their Infosys salary and the rest will come in from the NGO.

T oilet paper is doing the disappearing act from many loos. The bottomline was obviously more important than bottoms for a leading Indian pharmaceutical company, which decided to do away with toilet paper at its Mumbai office.

U -turn on hiring is what companies are doing. According to a new report by global staffing company Manpower, India Inc's hiring plans in the first quarter of 2009 will be the lowest since 2005. A quarterly poll of 3,597 Indian firms across seven sectors showed that only 19% employers have recruitment plans.

V ideo conferencing has replaced travel in leading firms. Telephone usage is also down by encouraging VoIP (voice over internet protocol) applications such as Skype.

W eeks just got shorter. A host of companies such as Force Motors, Bharat Forge and ThyssenKrupp Industries have introduced the five-day week to reduce costs.

X erox machines are vanishing from the offices as firms like GM impose restrictions on the number of colour photocopies and printouts.

Y es, boss! That’s what you have to say when you're told to work longer hours and on weekends.

Z ero... the size of your bonus this year, that’s if you still have the job.

Sunday, June 28, 2009

Credit Cards - Reward Points

IN AN economic slowdown, when the salaries are either on a freeze or going south - every penny counts. This is, in fact, a good time to review the loyalty programmes that retail chains, credit card companies and banks have on offer. If used wisely, these programmes can make purchases weigh lighter on your wallet and can even bring you a gift or two occasionally.
But to use loyalty programmes to the best of your advantage, you need to plan a bit.

To begin, you must compare the value of the rewards against your spend. The value of points can be calculated by checking worth of the reward against spends made to earn that reward. Therefore, you should chose a programme offering higher reward earning potential.

You must also compare the minimum number of points required for rewards. A programme that offers one point per Rs 100 spend and rewards start at 2,000 points, for example, is a better deal than one that offers two points per Rs 100 spent and rewards start at 20,000 points. But there’s a catch here too. For a better loyalty programme, you just might have to upgrade to a higher limit credit card. But most customers in India just don’t redeem their points. The average conversion rate in India is about 10%- 25%. The awareness level is still low. HDFC has about 26 million credit cards in circulation in the Indian market.

Check Breadth And Depth Of Reward Categories:

Most of the programmes have started offering a range of redemption options including garments, home appliances, cosmetics, gift vouchers, airline miles and donation to charities. However, you should choose the programme that offers maximum number of redemption options that suit your lifestyle needs. In this scenario of an economic slowdown, one should refrain from hefty spending. One should only buy things which add value. High ticket value items should be avoided by a credit card, unless absolutely necessary. All your hard work would go waste if your points expire. Therefore, you should select programmes offering non-expiry points. These points allows customers to accumulate points from year to year.

Make Every Day Spend On Credit Card:

Make it a habit to charge your spending and purchases on the card, especially daily spending such as in supermarkets, gas stations, cinemas. If you spend Rs 10,000 per month on these kinds of purchases and if you earn Rs 1 per Rs 100 spent you will collect 1,000 points per month which ads up to 1,200 points in a year. Even if you end up spending more, credit card companies these days offer 5% deduction through automatic clearing from your bank account to avoid late payment charges. It’s advisable to consolidate your spending with a single credit card to accumulate points faster. Big ticket items should always be consolidated into one single card.

Earn Bonus Points:

Some programmes offer bonus points, allowing customers to earn double, triple or even ten times the points for the same spend. For instance, HDFC Bank offers double reward points for purchases in the month of your birthday or some such specified period. Shoppers Stop too has such a scheme. Under our first citizen membership we offer a flat 15%-20% sale on all items two days of a year. We also offer special exchange schemes for people who buy a particular kind of product like apparel under our loyalty programs. You should look for a program that offers easy-to-use rewards redemption processes and faster delivery of rewards. Some loyalty programmes provide convenience of web-based redemption, home delivery and online order tracking. For instance, American Express offers attractive rewards on utility bill payments such as electricity, telephone and insurance.

You, however, should be wary of using credit cards to buy a large ticket item to accumulating a large number of reward points.

Saturday, June 27, 2009

Different types of stock trade - Long-term trades, Positional trades, Intra-day trades

You should invest in stocks through positional, intra-day or long-term trades for both capital preservation and high returns

Every trade is an interesting game where each player has his own rules and still everyone plays together. But every player, before entering the trade, has to decide his strategy and game plan for that trade. Before going for a trade, ask this very basic question - what type of trade is this? At most, trades are classified as long-term, positional and intra-day.

1) Long-term trades

These trades are called investments. The primary goal of an investment is to preserve capital. The investment should be made based purely on the fundamental factors of the 'sector and the company's business' and a premature exit should be made only if there is a change in the fundamental factors before the price target is achieved.

A fundamental investment call should not be associated with 'stop-loss levels'. The daily price fluctuations should not raise your blood pressure as you should accept volatility as a part of the game. An investor should set realistic expectations of returns from the investments and hope to get the best, but should be prepared for the worst.

2) Positional trades

If your trade horizon is one week to a fortnight, you can make use of the science of technical analysis where the trading ideas are identified based on the technical factors. These are known as positional calls and are based on price and volume actions, and other trade statistics.

As positional calls may not be in sync with fundamental factors, while taking a position based on technicals, you should always make use of stop-loss levels. Positional calls should not be converted into long-term investments just because a stop-loss has been hit. At most, these ideas are given in multiple ways like stock market diary, awacs or derivative products.

3) Intra-day trades

Trades undertaken to be squared off at the end of the day are intra-day trades. All intra-day trades will always have stop-loss levels and they have to be followed strictly. These may not be in sync with fundamental calls and there can be a fundamental buy and intra-day sell, or vice versa. For the scrips on which intraday calls are given, there may or may not be any fundamental view.

Globally, it has been observed that trading based on the best of the technical tools will have a success ratio of not more than 60-70 percent. You should look for a favourable reward-risk ratio which is normally 2:1 - for an expected profit of Rs 2 you are accepting a risk of losing Re 1.

So, even a 50 percent success ratio may generate handsome returns. Always remember that trading without stop-loss is like driving without brakes. The table gives a clear picture at various success ratios, with each position taken expected to have a profit target of Rs 2 with a stop-loss of Re 1. So, even a 40 percent success ratio can yield good profits if stop-losses are clearly kept and targets properly defined. Intraday calls are given through market diary, awacs or derivative products.

Many investors take positions in equities without deciding the type of trade it is and thereby do not have clear exit rules. Hence, they sometimes sell their profit making stocks with very small movements in price just because of anxiety even when there have been no negative developments in the underlying fundamentals. Sometimes, they don't sell even when the fundamentals have changed drastically. Both the situations can lead to missed profit opportunities and losses. Judicious classification and planning of every trade can greatly enhance your investment experience by eliminating emotions and reducing risk.

After deciding the type of trade, many traders commit another mistake - changing the type of trade. If a stop loss is hit, he converts a day trade to positional and positional to investment.

Friday, June 26, 2009

Portfolio: Asset allocation vital in volatile markets

It is time to evaluate your asset allocation and balance your portfolio again
The five-year bull run which we saw prior to 2008 had made concepts like debt, asset allocation, and financial planning quite unfashionable. The only investment destination one could think of was equity, thanks to the soaring stocks markets. Times have changed and so has the thinking. Investors are now giving more relevance to asset allocation and planning of investments keeping in mind the long-term financial goals.

A strategy which always works well in the long term is asset allocation. Asset allocation essentially means diversifying your money among different asset classes such as equity, debt and cash. This would depend on an individual's risk tolerance level and return expectations. The strategy also works well because different asset classes have a tendency to behave differently. While stocks can offer potential for growth, fixed income instruments can offer stability and income. This augurs well for the overall portfolio and balances the risk and reward.

So, if an investor were to devise an asset allocation strategy with respect to equity and debt, how would he go about it? First, let us understand what comprises equity and debt. While equity would mean individual stocks and equity mutual funds, debt would comprise fixed income instruments, bonds (medium to long-term) and money market instruments (short-term).

The goal of asset allocation is to create an efficient mix of asset classes that have the potential to appreciate while meeting your risk tolerance level and investment objectives. The key considerations for deciding the composition of the investment portfolio and amount of investment in each asset are expected returns and risk, time horizon, liquidity needs and tax aspect. The thumb rule is that the younger the investor, higher is the risk tolerance and time horizon, and hence greater should be the allocation to equity. A generalisation can be made that 100 minus your age should be the allocation to equity. This however needs to be altered based on risk appetite.

Based on risk tolerance there could be three types of portfolios:

  • Aggressive portfolio: Equity - 70 percent, long term debt - 20 percent, short term debt -10 percent.

  • Moderate portfolio: Equity - 50 percent, long term debt - 30 percent, short term debt - 20 percent.

  • Conservative portfolio: Equity - 25 percent, long term debt - 50 percent, short term debt - 25 percent.

The other crucial aspect of asset allocation is monitoring it. For example, if a person invests his money in equity and debt on a 50:50 ratio and if the market value of his equity investments drops to 40 percent, what should he do?

There are different asset allocation strategies he can adopt:

  • Buy and hold strategy:

This is a do-nothing strategy and no rebalancing is done.

  • Tactical strategy:

Depending on the prospects of a particular asset class, its proportion is increased or reduced to take the benefit of the movement. This strategy is risky and works only occasionally, hence best avoided.

  • Balanced asset allocation:

In this strategy, the proportion of assets is maintained, i.e., whenever the value of an asset class goes down, it is bought by liquidating a part of the asset class which has gone up. This strategy works well since one would buy cheap and sell high. However, this should not be done for a small increase or decrease. An increase or decrease of 10-15 percent would be a good level to act upon.

Time to act

During 2007, the proportion of equity in the overall portfolio would have gone up quite dramatically, thereby indicating a sell. Consequently, after the market downturn, the proportion of equity in the portfolio would have dropped, indicating a buy. So, rather than worrying about where the stock markets would go, you should monitor your investment portfolio based on the asset allocation principle, and take appropriate action. After all, asset allocation is probably the most important decision and may account for more than 80 percent of the returns from your portfolio.

Thursday, June 25, 2009

Banking operations now come at a price - where to save on charges

AT A time when financial awareness remains a challenge, more investors find themselves saddled with hidden costs and there seems to be a penalty for any wrong step you take at a bank. What’s worse, most of the charges come without prior notice. The charges range from non-maintenance of quarterly average bank deposit, cash payment penalty on credit cards to cheque book usage, among others.

From April 2007 to March 2008, such complaints increased almost threefold, to a staggering 490 cases, according to the Reserve Bank of India (RBI).


You just can’t afford to be indiscipline while banking today. It carries a financial burden. There’s a big penalty to be paid if you fail to maintain the average quarterly balance. Not only you are liable to pay Rs 500-1,500 as fine, but also chargeable for speaking to a customer care executive. India’s two largest private banks, ICICI Bank & HDFC Bank, ask you to shell out Rs 50 each time you make a call to the customer care office in the event of non-maintenance of quarterly average balance. Even cash transactions at branches in the event of non-maintenance of quarterly average balance are chargeable after a certain number of transactions in a quarter.


Most banks offer at least one cheque book (consisting of 25-30 payable-at-par cheque leafs) free per quarter with a regular savings account. This is typically an account that requires you to maintain Rs 5,000 as minimum quarterly balance in metro/ urban cities and Rs 2,500 in rural towns. While some private banks impose a Rs 5 per leaf charge on non-maintenance of the minimum balance, others charge Rs 2-5 per cheque leaf in case you require additional cheque leafs in a quarter. Similarly, if you are a no-frills account holder, then there is no free of cost cheque books on offer. It is advisable to go through the terms and conditions carefully before you open an account with a bank. In fact, in HDFC Bank, if you want to check out the status of your cheque, you are liable to pay an extra Rs 25 per instance.


If you believe that electronic transactions come at a price and are extra cautious over using ATMs, then read this: ICICI bank charges Rs 50 per transaction if you do cash transaction at your base branch more than 12 per quarter. In fact, Standard Chartered Bank has only the first four transactions on any channel (internet banking, phone banking, ATM and branches) per month as free. Subsequently, every transaction on any platform incurs a whopping Rs 75 per transaction. Most banks allow only a limited number of free cash transactions per quarter. Further, there’s an additional cost incurred, if you are banking at a non-base branch.


If you are one of those lazy people who leaves your credit card bill payments for the last day, then better pull up your socks. A majority of the banks now levy a penalty of Rs 100 if you make your credit card payments in cash. If you wish to avoid being in such a situation again, either pay by cheque at least four days before the due date or make online payment.


There’s a cost involved at every juncture while banking today. The so called personalised services comes at a price. The standing instruction facility may help you a great deal in escaping late payment penalties, but it comes at a price. Be ready to spend between Rs 50 and Rs 150 per instruction. And in case you wish to change any directives, there is an additional charge of Rs 25-75, depending on the bank.


Unlike most nationalised banks, private banks charge Rs 50-250 for documents such as balance certificate, interest certificate, address confirmation, signature attestation, photo attestation and others.


For careless people, there’s no place in today’s modern-day banking. There’s a penalty charge even for recklessness. Private banks now charge a fine of Rs 100 if you deposit cash in the cheque drop box. If the deposit amount is over Rs 500, the punishment is Rs 300. And if you repeat instances of cash deposits via cheque drop box, you attract an additional charge of Rs 500. The morale of the story is that next time you visit your bank — do remember to keep your eyes and ears open.

Wednesday, June 24, 2009

Personal Finance: Avoid “DEBT TRAP” with sound financial planning

PRUDENT saving and smart investing may be important for building your portfolio and creating a huge-nest egg, but assuming them to be the only keys to accumulating wealth is akin to financial hara-kiri. For, in the absence of a good debt strategy, the financial planning for your secured future can not only get topsy-turvy but awfully wobbly as well.

Debt management, in fact, assumes more importance in the light of the fact that today debt has become a way of our lives, with consumer finance schemes and credit cards becoming big drivers of this devil. Rising disposable incomes, soaring aspirations and convenience in availing credit have increased the amount of debt that an average individual is carrying. In the US, for instance, the household debt-to-income ratio is said to have reached an all-time high, topping 19%, with Americans collectively spending more than what they have earned for the past two years in a row. Likewise, the latest Grant Thornton research shows that personal debt in the UK has forged ahead of its GDP for the second year running. And, in all probability, India is also heading for a similar mess — sooner or later.

In such a scenario where delinquency rates are also increasing due to high interest rates, debt management becomes imperative. Also, because every year lakhs of people spend thousands of rupees only as interest on various loans taken by them. Therefore, following a prudent approach in managing one’s debt can go a long way in saving this money and thereby helping one lead a life free of debt.

The problem, however, is that while being debt free at some point in life is a pipe dream of a majority of people, very few are actually seen doing anything in this regard. Worse, they still keep looking for cheap and easy debt for further indulgence, notwithstanding its after-effects on their lives.

Actually, getting into debt is always not bad. Sometimes, particularly in times of crisis and emergency, you just can’t avoid it. But if managed well, this can even have a positive affect on your finances in both short as well as long run. However, the problem starts when people start taking debt for self-indulgence as well as keeping their friends and neighbours jealous.

In a sure sign of debt getting out of control, people start using their plastic money even for recurring expenses like getting the gas filled in the car, buying groceries and clothes, among others. Young men and women, pressed between small salaries and spiralling financial responsibilities, find it very easy to get tempted to go towards credit cards to help them get through the month. One never knows when one really gets caught in the debt trap, until one has to start borrowing to make pressing interest payments and outstanding loans. This eventually leads to spiral from which it becomes difficult to get out of.

Debt management, therefore, should be one of the integral parts of your personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts. This also means choosing the best loan option whenever one needs to borrow.

Here’s what you should take not of:

1) Avoid Getting Into New Debt:

As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. You’ll also need to be disciplined about paying down the debt.

2) Prioritise Your Dues:
You need to prioritise your dues and begin clearing them. You should know the costliest loan you have taken and this is the one you should clear first. For instance, clearing your relatively cheap housing loan won’t pay much if you are having huge credit card dues or other costly loans.

3) Refinance:

Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more palatable. But as a precautionary step, you should avoid extending the tenure of the loan as in that case you may end up paying more in interest.

4) Debt Consolidation:

You can also resort to debt consolidation. It basically means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his/her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. But this method too is not without its fair share of problems.

5) Zero-Interest Balance Transfer:

These days credit card companies are giving the option of zero-interest balance transfer under which no interest is charged for the first three months if you transfer the out standings of your other cards to their card. Only if you are unable to pay off the debt entirely during this period, you will be charged interest, that too at a bit lower rate. However, this scheme is also not without problems, but if used smartly, you can slash the cost of your debt.

6) Loan On Phone:

You can also convert some of your credit card purchases into relatively low-interest EMIs if you inform the card issuer within the specified period of making the purchase. This way you can save some money on interest.

7) Speeding Up Payments:

This is the most effective way of clearing your debt early as well as putting more money in your pocket over a lifetime. According to a rough estimate, for instance, if your are having Rs 1 lakh as credit card dues on which you are paying, say, 40% interest, then it will take close to 15 years to clear your dues if you continue paying 5% of the outstanding amount each month. The total payout and interest in this case would be Rs 265,950 and Rs 165,950, respectively. However, if you decide to pay 10% instead, you won’t only be able to clear the dues in just 7 years-and-a-half, but the total payout would be Rs 142,780, with only Rs 42,780 being the interest component. The Rs 123,170 saved in interest can be further invested. The gain, however, would be bigger as, for the sake of simplicity, we have not included other charges like service tax and annual fees, among others, which will make the repayment period even longer, and the payout bigger.

Thus, if you’re in the habit of making relatively small payments, stretching beyond your comfort zone could pay off big in the long run. And applying the same trick with your housing and other loan repayment can give you far better results.

It is clear, thus, that you should always avoid accumulating more debt as that is easy to slip into and very hard to get out of. However, if that is difficult to resist, then exercising some precautions will help. Ensure you take loans for building assets like home and not for instant gratification. Also, ensure that the loans you have taken are based on your current earnings and not future estimations. Restrict the loan tenure, amount and EMI which suit your lifestyle. And invest in better-return giving assets which can then be used to pay off the loans.

8) Last word:

The less debt you have, the happier and wealthier you’ll be!


Getting into debt is always not bad If managed well, this can even have a positive affect on your finances in both short as well as long run. The problem starts when people start taking debt for self-indulgence or start indiscriminate use of plastic money for recurring expenses. Debt management should be an integral part of personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts

Tuesday, June 23, 2009

Asset Allocation – A Contrarian Approach


There are mainly two approaches to asset allocation —

  • The Bandwagon Approach and
  • The Contrarian Approach.

In the bandwagon approach - one chases the best performing assets and broadly follows the crowd. In the contrarian approach one focuses more on core value and enters assets that may be out of favour.

The contrarian approach to asset allocation, if followed judiciously, can be rewarding. It combines a full range of fundamental and technical analysis, evaluating assets continuously — in the search for assets that are likely to reverse its past trend. It is not about just blindly doing the opposite of what the market is doing. It is about identifying assets that offer true value.


One of the key reasons for using a contrarian approach to asset allocation is the cyclicality of asset classes. There are also some asset classes that are complementary to the others. For instance, when interest rates go up, it hurts the bottom line of companies and hence equities are impacted negatively. On account of a spike in inflation last year, interest rates went up sharply — this was one of the key leading indicators that triggered the initial fall in Indian markets.

Similarly, gold is globally used as a safe investment avenue. When the outlook turns negative on stocks, investors move to safer asset classes like gold. While the Sensex dropped from a close of 20,301 on January 1 2008 to 13,802 on July 8 2009, a whopping 50% drop, gold prices in the global markets yielded an absolute return of 11%. An investor who took advantage of this trend would have topped up the good stock market returns, with gains in gold commodity. Cycle trend anticipation is the backbone of the contrarian approach to asset allocation. Different asset classes perform well at different times and timing the market is always a challenge. A well-balanced portfolio helps achieve best risk-adjusted returns. The right way to get the best of every asset class is proper asset allocation keeping in mind one’s risk appetite, the market cycle of each asset class and the time period one intends to stay invested.

A practical approach

A key to the successful practice of the contrarian approach is that investors should avoid unnecessary risk by being sufficiently diversified. The contrarian approach to asset allocation not only helps reduce portfolio risk by including investments that are negatively correlated; but also enhance returns by timely rebalancing of assets.

While the traditional school of thought believes in keeping one’s asset allocation fixed, a contrarian would work on a variable asset allocation pattern, depending on the outlook to the asset classes. In the first situation, the market is low, while the future outlook of equity is positive. Hence, the higher equity allocations in the contrarian approach. When markets run up and are at a high and the outlook to equity becomes negative, then one realigns the asset allocation and increases the allocation to debt and gold as shown in the second scenario. This example is simplistic. In reality, the asset allocation would be changed in phases. The success of the investor would depend on whether one was able to make this transition prior to the change in market cycle.

Monitoring and re-balancing

Consistent monitoring is essential to ensure that best returns are achieved at the relevant risk level. When any asset class delivers very high returns, its composition in the portfolio automatically changes. However, rebalancing too quickly can have a negative impact. For example, the last bull cycle started when the BSE Sensex was around 3,000 points in April 2003 and hit a high of 20,869 on January 19, 2008. An investor who was happy with a good 100% returns would have missed most of the rally that followed.

A few TIPS:

  • A diversified approach across various asset classes is important to success. E.g. Equity, Debt, Gold, Commodities, Real Estate, etc.
  • An understanding of the correlation between asset classes is vital to the contrarian approach. Only use asset classes that you can track.
  • Study market cycles, lest you exit too early and miss a bigger market opportunity. Risk should be the basis of most switches.
  • Think long term - most asset classes deliver returns only in the long term. Contrarian style for a short term investor can be very damaging.
  • A phased approach to realigning the portfolio (switches in asset composition) can be used to reduce the dependence on 'timing the market'.
  • Keep your financial goals in mind while doing your asset allocation.
  • Do not get emotionally involved. "Fear and Greed" are two emotions that result in taking irrational actions that are not financially rewarding.

Monday, June 22, 2009

AMFI - Certification

This post will help you in understanding what AMFI is about, who should go for this certification, training material and preparation guidelines.

AMFI is an apex body of all Asset Management Companies (AMC), which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.

About Certification

  • THE Securities and Exchange Board of India (SEBI) has made AMFI certification mandatory for all mutual fund agents.
  • The Association of Mutual Funds in India (AMFI) runs a certification programme for agents and distributors of mutual funds.
  • Following the SEBI notification, agents and distributors appointed by all mutual funds including Unit Trust of India should have AMFI certification.
  • The market regulator has also made mandatory for the existing agents and distributors, this certification programme by March 31, 2003.
  • SEBI has also said that the employees of mutual funds, particularly those involved in sales and marketing should be encouraged to pass the certification process by December 2002.

Types of Certification

AMFI Mutual Fund Certification is based on a testing programme. There are two Modules of the test.

  1. AMFI Certification (Basic) - This is a general test covering the concept, structure and other essential general topics. This is meant for all employees of Mutual Funds (other than those who are engaged in selling and marketing activities), general public and for those who would like to have a basic knowledge of concept and working of Mutual Funds. Any one who desires to acquire knowledge of the functioning of the mutual fund without seeking to become a fund distributor can take part one test independently. A certificate will be issued separately for Basic Module test to the successful candidates. There is no validity period for the AMFI-Mutual Fund (Basic) Module certification.
  2. AMFI Certification (Advisory) - The second is the AMFI Mutual Fund (Advisors) Module and it covers subjects such as financial planning, risks in fund investing, model portfolio selection in addition to the subjects covered under the Basic Module and constitute a single certification programme which is designed for certification of fund distributors or intermediaries engaged in selling mutual fund schemes, employees of corporate intermediaries and employees of mutual funds who are engaged in selling and marketing activities. The validity period for the AMFI-Mutual Fund (Advisors) module certification is for five years.

This certification is also ideally suited for IT professionals & IT Business Analysts who are engaged in Projects of Asset Management Co’s worldwide, which walks you through the regulatory body, types of mutual Funds and helps you gain domain expertise.

Examination & Course Material

1. Course Material -The workbook/course material can be obtained from the office of AMFI at:

709, Raheja Centre,
Free Press Journal Marg,
Nariman Point, Mumbai 400 021, India.

The price of the workbook is Rs.300/-. The same can also be ordered by post by sending a DD for Rs.400/- (inclusive of Rs.100/- as postage / courier charge) favouring 'Association of Mutual Funds in India' payable at Mumbai.

Postage Charges of Rs. 50/- payable for deliveries by courier in Mumbai Upto Virar (on Western Line), upto Kalyan (on Central Line) and upto Panvel (on Harbour Line) and Rs. 100/- for delivery at all other destinations.

For further Clarifications please send mail to

2. Examination which is offline as well as online is conducted in collaboration with NSE. AMFI Mutual Fund Test is a separate Module of the National Stock Exchange's(NSE)'s Certification in Financial Markets (NCFM) which also offers other subjects such as for Derivative Trading, Capital Markets etc.

Further the Cost to go for online examination is 1000 Rs which can be done by registering to NCFM Website. i.e.

Preparation guidelines

1. Preparing for AMFI is not like studying rocket science, by dedicating an hour or more... you can complete all the chapters in 2 weeks.

2. You can jot down some important dates mentioned in the workbook, and note down all formulas and practice them well (as most of the questions are up on calculating NAV ,etc)

3. Workbook is your bible, read thoroughly and use this test paper/question set mentioned above in link to answer them and go through the chapters again from work book if you fail to understand.

4. So ideally it should not take more then a month to prepare.

5. However it would be wise to keep yourself updated about Mutual Funds, practices, through all possible means like websites, blogs, Economic times, Business Standard etc to make your preparation for AMFI test easy.

Hope my this effort to add my experience about this certification will benefit my readers.

I encourage my readers to raise comments with respect to your understanding and clarifications.

Apart from this blog also refer AMFI SITE i.e. for more clarification.

For any questions or clarifications please leave your comment on the site.

Sunday, June 21, 2009

6 Ways to Make Money Blogging

1) Cost-Per-Click (CPC) Advertising Programs

CPC advertising programs are the best money making programs for most of the bloggers. They are suitable to all kind of blogs with family-friendly content regardless of their traffic level and age. CPC programs work well on blog because they display contextual ads that are highly relevant to blogs content and bloggers will earn anywhere between 10 cents to 50 cents for each contextual ads click by their visitors. With proper CPC ads optimization and consistent amount of traffic, a blogger can earn a steady amount of money displaying CPC ads on his/her blog. Google AdSense is no doubt, the undisputed king of CPC advertising programs and Yahoo Publisher Network is the closest alternative of AdSense.

2) Cost-Per-Action (CPA) Advertising Programs

CPA programs is quite similar to CPC programs except CPA programs don't pay bloggers for each click on the CPA ads hosted by bloggers. The blogger only makes money when the visitor takes an action on the CPA advertiser website. The action can be a sign up, making a purchase, generating a lead, downloading a product and more. CPA networks pay a lot more than CPC programs, for a visitor sent by the blogger from his/her blog to a CPA advertiser website and the visitor taken an action on the advertiser site, the blogger can earn few dollar to fifty dollar depend on the niche. But CPA ads tend to work well on large traffic blogs only., Commission Junction and are some of the largest CPA networks.

3) Promote Affiliate Programs

Marketing affiliate programs is very common nowadays. You sign up with affiliate program of an online company, then decide whether to use the company's text link or banner ads on your blog to promote the company's products or services and earn affiliate commission when a visitor make a purchase through your affiliate link. Affiliate programs can be promoted without a website and blog too.

4) Pay Per Post Programs

Pay per post programs started last year. The programs pay bloggers to write a blog post about a sponsor's website. The paid blog post can be a review or an introduction on the advertiser's website, products or services. The blogger will be paid a least $5 for each sponsor post. Blogs that have massive traffic, high Google PR and large number of subscribers can charge a few hundred dollar for just writing one sponsor post. Here's are the two most popular Pay per post networks that offer this type of earning opportunities:

The downside of pay per post is that writing too many sponsor posts that are not relevant to your blog content can seriously affect your traffic.

5) Sell Text Link Ads

Selling text links on your blog can be a great source of additional online revenue. It is not difficult to get started, just go to to sign up an account, then decide which part of your pages you want to display paid text links, set your price and you are ready to take order. will handle all the promotional works. Another company that offers the similar services as is

6) Hosting Web Poll

Vizu Answer offers a pretty new way to monetize your blog's and website's traffic. The pays the publishers on a cost-per-thousand impression (CPM) basis for hosting targeted web poll. The money a blogger can earn from hosting poll is depending on the page views. The more page views, the higher the earning.

Saturday, June 20, 2009

Investment Planning: 4 golden rules of equity investing

IF you want to invest in equities, there are only four things you need to remember.

1. Choose the right company

Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.

Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.

2. Be disciplined

Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.

--Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest beyond equities

--Research and analyse your company's performance through quarterly results, annual reports and news articles.

--Get a good broker and understand settlement systems

--Ignore hot tips. If hot tips really worked, we'd all be millionaires.

--Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.

3. Monitor and review

Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking! Find out how you can buy 1 rupee coins at 50 paise!

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the portfolio at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

4. Learn from your mistakes

When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.

Friday, June 19, 2009

Gold prices on the rise

The yellow metal is a good avenue now for short-term investors

Every time equity and other markets turn bearish, investors turn to the yellow metal to park funds. It has been no different this time as gold has turned the new safe haven for many. As would happen in every boom market, investors chase an instrument even if it is on the rise on a continuous basis. In fact, it has happened with various other instruments like equity, property, crude oil, and it seems to be the turn of gold which has been scaling a new peak at regular intervals. Expectedly, new highs are being projected for the yellow metal.

Needless to say, investors need to be slightly cautious with their investment strategies as it is easy to get carried away by the current environment. While gold is definitely an option for the next 12-24 months, the instrument too carries its baggage of risks at the current levels. More importantly, rather than demand, other factors such as growing comfort of investors and increasing interest in the metal from speculators, have been pushing the price of gold like with many other instruments.

In the current environment, it is worth taking a closer look at the demand scene. Many would have noticed that there has been a clear shift in demand as domestic buyers are not rushing to buy the metal for jewellery because of the rapid rise in prices. Despite the wedding season, jewellers complain that sales have been muted. On the other hand, investors have been flocking to the metal as an investment option and the allocation in favour of the metal has been on the rise. In fact, gold has been the most preferred product after debt in the last six months.

Going forward, many believe that gold would continue to account for larger allocations not just for individual investors but also for institutional investors as there would be a gradual shift from currency to yellow metal across the globe. That would also mean increased volatility and large scale selling pressures when other alternate options turn attractive. Hence, investors need to be cautious with their tenure of investment and should monitor the price movement carefully.

For the short to medium term investors, gold definitely looks an attractive option and can be equated with some of the debt options such as income funds. The dilemma for many is whether to choose an ETF (exchange-traded fund) or a gold fund which also invests in other metals and mining companies. Despite the sharp run-up in gold prices, the performance of gold funds has been below that of ETF and hence at this point ETF looks a better option than gold fund, particularly for short-term investors. In the long run, however, you can allocate a portion of your corpus for gold funds as they have the potential for a good performance in a good economic environment. More importantly, it would be prudent for investors to stagger their investments, either selling or buying, as gold looks good in the current environment.

Thursday, June 18, 2009

Free-Float Market Capitalisation

THE impending realignment of NSE indices on the basis of free-float market capitalisation has put index funds and exchange traded funds in a spot of bother.
According to mutual fund analysts, the exchange-proposed changes in stock weightages will result in widening of tracking error in index funds. Index funds are passively-managed funds wherein the fund manager attempts to mirror the performance of a benchmark index, by investing the corpus in the index components in proportion to their weightage in the index. Tracking error is the difference between returns from the index fund to that of the index. Lower the tracking error, closer are the returns of the fund to that of the target index.

Funds with tracking error lower than 1% are good performers, according to mutual fund analysts. The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%, industry sources said.

There could be some tracking error as weightage realignment of the whole index would mean a lot of buying and selling of shares. Unlike in other times when one stock is excluded from the index, the whole benchmark is being revamped this time round. However, the realignment process won’t take long as net AUM in index funds and ETFs are just over Rs 1,300 crore. Analysts say stocks that were heavyweights but had low floating stock, will be adversely impacted because of the realignment. HDFC (+2.7%), ITC (+5.2%), Infosys (3.8%) and ICICI Bank (+2.8%) would be the major beneficiaries while NTPC (- 6.7%), ONGC (-3.5) and Bharti Airtel (-1.7) would lose their weightage in the index.

Sectorwise, a positive shift in weightage would be witnessed in banking and FMGC, while power and oil & gas would be the major losers. To start with, NSE will realign the Nifty-50, CNX 100 Nifty, S&P CNX 500 companies and its dollar index Defty on free-float market capitalisation basis. The Nifty would move to free-float methodology from June 26 onwards.

The realignment will be done on the previous day of the change in benchmark weightages. Our annualised tracking error is around 0.2%; tracking error might just go up marginally over the medium term. There could be a small rise in transaction charges as index portfolios will have to be aligned; this may result in a marginal fall in NAVs of schemes.


According to analysts, the exchange-proposed changes in weightages will result in widening of tracking error

Tracking error is the difference between returns from the index fund to that of the index

The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%

Wednesday, June 17, 2009

Fed rates and Indian domestic economy

The relation between the Fed’s interest rates and the markets here

The US Federal Reserve has decided to leave the interest rates unchanged. However, it has expressed concerns on the escalating crisis. The unanimous decision left the benchmark overnight rates at two percent. The Fed has said, 'strains in the financial markets have increased significantly and labour markets have weakened further'. The central bank said it also remained concerned about the inflation pressures. The Fed said the downside risks to growth and upside risks to inflation are of significant concern to the committee. The move is expected to enable banks in the US to borrow money for the short term from the Fed as well as lend to each other at the same rate as before.

In the past few months, the Federal Reserve had been cutting US short-term interest rates amidst concerns that the economic growth will slow down in the coming months. The effort was to stimulate economic activity and keep the country from dipping into a recession. According to the Federal Open Market Committee (FOMC) the upside risks to inflation roughly balanced the downside risks to growth. Earlier, the FOMC had indicated that the strains in the financial markets had somewhat eased. Housing is likely to slow the pace of economic slowdown, it added. Though, some inflation risks is arising.

With the last year bankruptcy of the financial major Lehman Brothers and troubles of AIG, the Fed had no other option but to keep the interest rates steady. A good point was that the oil prices have somewhat eased. According to the Fed, the pace of economic expansion will slow down in the near term, partly reflecting the intensification of the housing correction.

Last year, the Fed had slashed borrowing costs periodically. The concerns over housing and credit seem to be dominant. The Fed had reduced rates in an effort to keep the economy growing at a 'moderate pace'. The move was aimed to avoid a recession.

The central bank's present move will offer some relief to the ailing credit markets which have tightened as major commercial banks have sustained hefty losses tied to mortgage backed securities. This action will help stabilise the financial markets.

There are still sectors of the credit markets that are not functioning very well. Without enough capital, firms hesitate to invest.

The Fed has cited concerns of rising energy and commodity prices which could renew inflationary pressures. Also, housing and credit worries outweigh inflation risks. Sales of existing homes and apartments have dropped.

Inflows from abroad may reduce after the Federal Reserve maintained interest rates. There would certainly be some repercussions on the domestic markets. It may be a signal to the Reserve Bank of India (RBI) that interest rates need to be maintained at the present levels.

In the past, the rate cuts by the Fed have translated into a major boost for the domestic stock markets, and increased inflows of foreign funds. With an increase in foreign funds, the dollar depreciated against the rupee. So, exporters felt the pinch. Moreover, with foreign funds pouring in, liquidity increased and the risks of inflationary pressures also increased. A fresh flood of capital complicated the monetary and inflation management for the Reserve Bank of India. There were pressures on asset markets (stocks, bonds, currencies) on the back of risk-aversion induced capital outflows. The US holds significant implications for emerging markets.

The Fed interest rate stability helps the worth of US dollar-denominated investments. The dollar is likely to stop depreciating further against the rupee. The rupee has appreciated nearly 12 percent against the dollar in the last one year. The rising rupee value prompted most engineering and textile sector exporters to go for forward bookings of export shipments. This can help the competitiveness of exporters, especially textile and garment players.

Tuesday, June 16, 2009

Factors investors need to track that have a bearing on stock market movements in the near term

The stock markets had been in a bearish phase since the last few quarters. However, the previous quarter's stock market indices registered a positive closing (up 1.5 percent). This is due to the sharp rally seen last month in the markets. Some experts are of the opinion that the markets have bottomed out. According to them the current rally has some steam left to take the markets upwards from the current levels. On the other hand, there are analysts who argue the current rally is just based on some initial data of economic recovery in the global markets and investors should watch further data points and market trends cautiously before assuming a bottom out in the markets. There are some important factors investors should track closely in the next few weeks.

1) Relevant global issues:

  • Economic growth in developed economies

The overall economic growth numbers of developed countries will be an important issue. Many large economies confirmed negative economic growth over the last couple of quarters. It will be interesting to watch the results in the last quarter (first quarter of 2009).

  • FII investments

Foreign institutional investors (FIIs) have been the key drivers of markets here during the last few years. They have been selling equity in emerging markets and withdrawing funds since last year. FIIs turned net buyers in the domestic markets last month and the markets are going up again. Investors should watch FII movements in the markets.

  • Corporate results

The slowdown in the housing and financial sectors gripped the other sectors during the last quarter. Investors should track the first quarter results of large multi-national companies (especially companies in retail, auto, insurance etc) closely.

  • US consumer data

The trigger of the current slowdown was the US housing sector. The US government has announced several relief packages and rebates for home buyers. It will be interesting to watch the monthly and quarterly sales numbers of new houses. Also, the tax relief given by the government is expected to drive other consumer activities. It will be good to track the US consumer data over the next few months. It is important to watch the trends as just one data point might give a wrong indication.

2) Relevant domestic issues:

  • Results and annual guidance

This is the annual results season for the first quarter of financial year 2009-10. The annual results of this year will be quite interesting as the overall economic condition was challenging for many companies. It is interesting to watch the annual numbers and listen to the company managements on the next year's business prospects.

  • Fiscal deficit

The fiscal deficit has gone haywire this year due to the lower corporate tax collection, discretionary government spending on account of fiscal stimulus, and lower inflows from foreign institutions. Some large rating companies have expressed concern on the worsening situation of fiscal deficit. It would be interesting to watch how FIIs and global investors react to any downward revision in the investment ratings.

  • RBI action

The Reserve Bank of India (RBI) has softened the monetary policy quite significantly during the last six months. Since inflation has dropped down to virtually zero percent, analysts are expecting a further cut in the key policy rates and reserve ratio by the RBI. Investors should keep a track of RBI's moves in this regard.

Monday, June 15, 2009

ESOP repricing is norm as stocks tumble

FALLING stock prices have left many employees in a sticky situation, mainly vis-a-vis their employee stock option plan (ESOP). The market price for the options, in several cases, is lower than the conversion price. Since this may have a bearing on employee morale, some firms have been considering the prospect of repricing their employee stock options. Market regulator Sebi allows the repricing of options if the exercise price becomes less than the market price.

Recently, companies such as Jain Irrigation, India Infoline, Dish TV and Geojit Securities have repriced their Esops. Jain Irrigation had issued Esops at prices between Rs 447 and Rs 560 in 2005. However, with the current market price of Rs 340, it will reprice its stock options at the ruling market price in addition to a discount of Rs 52.20.

India Infoline, for example, has cleared a proposal to reprice the Esops issued in 2007 at Rs 88 to Rs 45.3, early this year. Dish TV, cleared a proposal to reprice Esops at Rs 36.10 which is much lower than the price of Rs 75.2 it had originally settled for. It’s not only Indian firms. Even foreign companies have followed suit. Earlier this year, Google employees got a chance to exchange underwater stock options in a 1:1 ratio, under a programme intended to increase retention.

However, the issue of repricing Esops is a subject of debate. In most instances, Esops are granted over and above the existing market-determined cash compensation coupled with a sink-or-swim-together philosophy. The message here is — if markets do well, we all make money. If they don’t do well, Esop holders lose the potential profit while investors actually lose their real wealth.

Therefore, in certain circumstances, repricing may not necessarily go down well with the shareholders. They may take a view that Esops should make money only if the other shareholders have also created wealth for themselves.

Sunday, June 14, 2009

Corporate Fixed Deposits

Fixed deposits (FDs) of companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits.

  • Tenure:

The tenure can vary from a minimum period of 15 days to five years and above, but short tenured FDs continue to be the best bet. Even if a 3-year-long FD looks lucrative, it’s advisable to pick a short-tenured one. In a falling interest rate regime (like the current one), it is advisable to invest in longer tenure FDs with higher interest rate.

  • Security:

These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. Therefore, always pay heed to the rating before putting money into any such FD.

  • Category of investor:

Senior citizens, shareholders and employees are generally entitled to a higher rate of return (say, 0.5%) than other general category retail investors.

  • Taxation:

Company FDs offer the tax saver deposit, which qualifies as an eligible investment up to rupees one lakh (consolidated with other tax saving instruments), under section 80C of the Income Tax Act, for income tax deduction, with a lock in period of five years. TDS is deductible over and above Rs 5000.

  • Rate of Interest:

The rate of interest on company FDs is normally higher than the rates offered by banks. This could be attributed to the element of risk involved while investing in a corporate FD as against a bank. As banks are subject to control of the Reserve Bank of India, bank deposits are fairly safer instruments.

  • Regulations:

Deposits thus mobilised are governed by the Companies Act under Section 58A.

  • Auto Renewal:

This facility preempts the need to remember the maturity dates of various deposits. The deposit is automatically renewed on maturity as per the depositor’s instructions. The risk of losing further interest on a matured deposit is thus removed.

  • Liquidity:

Find out how the FD fares on the pre-mature encashment front, i.e., how easily would the investment be liquidated. Also enquire about the penalty clauses, e.g. is there a loss of interest and/or in principal amount.

  • Additional benefits:

Fixed deposits from reputed entities offer additional benefits, e.g., they can be used as collateral for raising loans, premature withdrawal and cumulative accrual of interest is also allowed.

Saturday, June 13, 2009

Debt Instrument: Safer option in turbulent times equity for capital preservation

The macroeconomic factors world-wide have been quite shaky over the last couple of quarters. As a result, the stock markets have been quite volatile with a negative bias all over the world. In line with market conditions, the performance of equity based instruments remained quite subdued. As uncertainty prevails in stock markets, investors are not keen on putting their money in equity-based instruments.

The meltdown in the equity markets started with the slowdown in some countries. This coupled with several other negative developments like a sharp rise and fall in commodity prices (crude oil, metals, food items etc), fall in the global inflation rate and meltdown of some of the large financial houses kept triggering negative sentiments in the markets.

Analysts believe the negative sentiments will continue in the stock markets for a few more quarters, and therefore, the stock markets will remain volatile in the medium term. Therefore, it will be risky to invest in equity-based instruments. Investors with a low risk appetite should reduce their equity exposure and allocate a larger portion of their investment basket to debt instruments, which offer attractive returns in the current high interest rate situation. Debt instruments include corporate debt, liquid/liquid plus funds, debt mutual funds, bank deposits, public provident fund etc. The main objective of debt funds is preservation of principal with modest returns in the form of interest or dividend.

These are some factors investors should consider while choosing debt instruments:

A) Objective

The investment objective could vary from short-term parking of funds and waiting for investment opportunities, to investing in low risk long-term funds for capital preservation. It is important to analyse the objective as it helps in selecting the right investment instrument.

B) Time frame

A timeframe in mind helps choose the right investment instrument. There are instruments with a longer timeframe and give decent returns with less flexibility in terms of liquidity. On the other hand, there are funds with a lot of liquidity but yield lesser returns.

There are various types of debt instruments available in the market:

  • Debt mutual fund

Debt mutual funds include instruments like corporate debt, liquid funds, debt funds etc. The main objective of a debt fund is the preservation of principal, accompanied by modest returns. Liquid and liquid plus funds are attracting foreign investors, domestic funds as well as high net worth individuals. Liquid funds are used to park money for a short term. They provide high flexibility. Many institutional investors have been investing in debt funds here due to the vast difference between domestic and overseas interest rates.

  • Bank deposit

Banks have increased the rate of interest on their fixed deposits to attract funds in these tight monetary conditions. Many banks are offering 10-10.5 percent on 1-2 years' maturity fixed deposits. Bank deposits are also good for short-term investors (less than three months) who generally keep their money in the savings account.

A short-term bank fixed deposit provides 6-7 percent returns. Nowadays, many banks provide funds sweep-in/sweep-out facility where a balance beyond a certain limit automatically gets converted into a fixed deposit and the bank pays a much higher interest rate than the normal savings account interest rate.

  • Commodities

Investments in gold and silver (or gold exchange traded fund) is another attractive option for debt investors. Investments in commodities have yielded good returns over the last few quarters and analysts believe that more funds are pouring into the commodities market due to the negative sentiments prevailing in the equity markets.

Friday, June 12, 2009

Buy stocks in small quantities and have a profit/loss trigger to exit

The markets rallied over the last few days and there was a bounce back. The market sentiments improved due to a drop in the rate of inflation, rate cut by the Reserve Bank of India (RBI), fuel prices cut, financial stimulus package announced by the government and some positive news from global markets.

Currently, a rally in many beaten down sectors like banks, real estate and some select mid-cap stocks is on. Most of the stocks in these sectors have bounced back 20 to 30 percent from their yearly lows. However, analysts believe this rally is just a technical pull-back rally in a bear market. There are no clear and decisive signals that economic and business conditions are improving. Current, the rally is based on cuts and packages announced by the government and the RBI, and expectations that more measures will be announced.

Analysts believe the relief measures announced by the government are too small to handle the slowdown and investors should not expect something very dramatic from government in the coming days as they have limited options. Therefore, small investors should exercise extreme caution in the current market conditions.

Some strategies for investors:

A) Short-term investors

Investors willing to ride the short-term market rallies should be very careful and attentive to market news. They should track market movements closely and maintain a tight stop loss and book-profit level for their open positions. Since the markets are quite volatile, overnight open positions could be very dangerous, especially in the futures and options markets.

Short-term investors should remain in continuous touch with the markets. It is advisable for them to watch the market closely, especially if they are holding any open positions.

B) Medium and long-term investors

The market conditions are changing quite rapidly. It is very important for medium and long-term investors to have patience, and analyse the market and business conditions before making investment decisions. The next six weeks are expected to be quite crucial for the markets. Also, some data on the impact of the current monetary policy cuts announced by the RBI and stimulus packages announced by government will be in.

Existing investors who entered at lower levels should look at selling partially and booking some profits as the markets have gone up. Analysts believe the current market is just a bear market rally and it will fizzle out once the market rumors settle down. Therefore, investors can liquidate some positions and wait for better investment opportunities in the market.

Investors trapped on under-performing stocks should look for exit opportunities in the current market and switch to other stocks and sectors. Investors looking at investing should buy large-cap (index companies) and large mid-cap companies only.

Since the markets are quite volatile with a negative bias, it is important to accumulate in short quantities. Investors should buy or sell in small lots so that they can get a good average entry (or exit) price.

Since investments in market instruments come with a risk of loss, investors with a low risk appetite should either stay away from stocks or invest through equity mutual funds.

Thursday, June 11, 2009

Bear markets may kill, but bulls always return with vengeance

Average Gain Between Any Two Downturns Has Been 186%
IF you have lost a fortune in shares by now, the best way to make it up perhaps could be by buying some more. Since the Great Depression of 1929, the world has undergone 12 major bear market phases. The average bear market has lasted about 22 months, and the market has fallen by an average of 51%. However, the average gain during the bull market between any two downturns has been an eye-popping 186%. The index here in question is the S&P 500.

Bull markets — after every recessionary phase — have always been good for investors. All major bull rallies since end-1930 have resulted in markets gaining between 50-500%. Historic numbers show that the magnitude (size or breadth) of a bull market is much heavier than that of a bear market. The million dollar question is: Are we at the threshold of another bull market rally?

Markets could go up intermittently, but convincing rallies will take time to happen. The current bear phase is different from what we’ve experienced in the past. There are so many negative factors — distinct and country-specific — plaguing various economies. Only a rise in global demand and depreciating dollar could do some good for the economy and market.

As per Bloomberg data, if one considers the period between 1929 and 1953, there were about 33 months of bear markets, eroding the S&P 500 index by over 86%; the intermittent bull rallies (spanning about 268 months) during the same period logged returns of over 627% from lows. Likewise in 1968 — during the days of Penn Central Railroad Bankruptcy — the bear phase lasted for 11 months eroding the index by over 36%. This was followed by 22 months of solid gains (about 57%) in the market. The market in 1973 — in the days of Arab Oil Embargo and the Watergate — shed about 48% in a span of 21 months; it however, recovered recording a rip roaring 95% gain (70 months duration) in the index. The dot com bust in early-2000 resulted in market losing about 50%; the ensuing bull phase saw the S&P index rising over 97% from lows.

According to experts, there is much more external support for the market to recover than previous times.

Stimulus packages and concerted global action to set ailing economies right have never happened before in times of global recession and the subsequent bear market phase. The package and the combined reconstruction efforts of all economies — both fiscal and monetary — should help the market recover even faster.

It may take time for the economy to recover; though we may see some negative momentum, markets could look better from hereon. Analysts are expecting emerging market inflows to gather steam post the G-20 meet.

Wednesday, June 10, 2009

Diversify to mitigate the Risk

Since the second half of 2003, we have seen the longest bull run in the domestic equity markets. Investors created significant wealth over these years and in the process we all forgot the basic principle of investing - diversification. Although we all believe that investments in equity is the best tool to counter inflation, and we also believe the growth will take place over the long term, short-term jolts can be severe and can take away a significant part of the gains. The last six months have forced us to rethink the mistake that many of us made, namely, putting all eggs in one basket.

Alternative investing is an effective diversification tool that has been much talked about, but seldom practiced, especially in a buyout market. It's the golden rule of investing, and is a critical part of a thorough financial plan to appropriately allocate assets that suit one's personal objectives, risk tolerance and time horizon. For most, a mix of traditional investments such as stocks and bonds is a suitable approach. However, more affluent and informed investors should also consider alternative investments to further broaden their portfolios.

The three broad ways by which one can diversify one's portfolio are:

  • Asset class diversification,
  • Strategy diversification, and
  • Geographic diversification.

  • Asset classes

The most common and traditional form is diversifying across various asset classes, such as equities, fixed income, real estate, commodities like bullion and crude, and so on. However, many investors will readily sacrifice this discipline when a particular asset class is faring exceedingly well. As a result, their allocations become distorted.

There are dedicated products that offer great investment opportunities across various asset classes, and a few of them also offer hybrid structures that combine strategies and work well from the portfolio diversification perspective.

  • Strategy diversification

Diversifying your portfolio across various strategies is another way to de-risk it, especially when you're principally bullish on a particular asset class. This helps you participate in the same market through various products and strategies that diversify risk. For example, a direct equity investor must also consider options like diversified equity mutual funds, thematic funds, portfolio management services, and hybrid structured products, depending on his specific risk profile.

  • Geographic diversification

However, one of the most important issues in the current scenario is to diversify the portfolio geographically across economies worldwide. As we all know, different economies have different growth cycles and different times, which keep the balance in the portfolio intact. It had been a distant dream for many investors. However, now investing in overseas economies is simpler and seamless. These investments can be made in two ways. First, the Reserve Bank of India (RBI) allows you to invest up to $200,000 a year in foreign markets. This allows investors to buy into foreign funds that can be further diversified into various funds, based on the investor's objectives.

Tuesday, June 9, 2009

Tax Planning - Capitalise on Losses

It makes perfect sense to offset short-term capital losses against short-term or long-term gains not just for this financial year, but for up to eight consecutive years

REMEMBER the catch phrase of Unilever’s globally-acclaimed TV commercial for washing powder brand, Surf Excel — daag achche hain (stains are good). It conveyed that if an experience is a learning one, then stains can be indeed good. Investing too has its share of good and bad experiences. But, what differentiates an intelligent investor from the other is the ability to gain from losses. Yes, you read it right! This week, we decided to give you a few reasons to book your capital losses to ensure better returns — not only this financial year but also for future.

According to provisions, you are allowed to offset short-term capital losses against short-term or long-term capital gains not just for this financial year, but for up to eight consecutive years. This means that if you book short-term capital losses before March 31, you can not only reduce tax incidence for the year on capital gains income but also save on capital gains, if any, you acquire over the next eight financial years.

For starters, short-term capital assets is one which is held for not more than 36 months immediately prior to the date of transfer. There are, however, exceptions. In case of shares, securities units of UTI, specified mutual funds and zero coupon bonds, if they are held for not more than 12 months, they would be considered as short-term capital assets. The definition, in case of, long-term capital assets is simple. Those assets other than short-term capital assets would be considered as long-term capital assets.


Tax experts say your first step should be to ensure that all income, expenses, profits and losses relating to this financial year are appropriately determined and captured by way of documentation in order to be assessed accordingly. Once done, if you have made profits on certain assets (as a result of which you are liable to pay tax), then you must evaluate the performance of your short-term assets. If these assets are, in any case, not likely to fetch a profit in the foreseeable future, then you must dispose them and book losses to set off such losses against the gains computed from the sale of other capital assets. Even if you think that these assets can deliver in the times to come, you can still go ahead with your decision. Confused? Logic is simple: you can always buyback these assets at the same price you sold them in the market. And since you bought them again, any gain or loss arising out of these assets would be treated as short-term for 12 or 36 months, depending on the nature of the asset. For instance, suppose you have Rs 10 lakh as capital gain from the property and you are holding shares/mutual units which are at a loss (short-term) of Rs 12 lakh on March 30, 2008. Then, it’s advisable to sell the shares and buyback the same day. In this process, loss will be booked from the income-tax point of view and capital gains arising out of property will be exempt. Further, you can carry forward Rs 2 lakh as short-term capital losses to the next eight financial years.


It may seem to be a simple black and white decision, but there are intricacies involved. Tax advisers say you must keep the cost factor in mind. Besides that, income tax returns for carry forward of losses should be filed on or before the due date of filing the return of income. This is a must to claim the set-off of the carried forward losses in future years, otherwise you may not be entitled to set off such losses.

It is worth mentioning here that losses on long-term assets can be set off only against gains from sale of long-term assets. Accordingly, booking losses on long-term shares may not be of much use as such losses can be set-off against gains from long-term shares, and gains are, in any case, exempt. Then, long-term capital losses on the transfer of shares sold through recognised stock exchange are not allowed to be set-off. But, if these shares are not sold through stock exchange, long-term capital loss is allowed to be set-off against other income.

So, what are you waiting for, you have two days left to make every penny count. Go on and make sure that you make the best of this opportunity.

Wishing you happy losses!!!

Monday, June 8, 2009

DEBT SECURITIES – Safe in volatile stock market

In these uncertain and volatile market conditions, investors are flocking to invest in debt securities to ensure not only stable and certain returns but more importantly capital protection


Across the globe, financial and economic markets have taken a severe beating and there are expectations of recession in developed countries. In this backdrop, the Indian markets have also been affected but not as badly as the others.


Investors have seen their wealth, especially in shares, erode faster than they would have imagined or liked. Thus, investors are now increasingly flocking to invest in debt securities. So what are their options and the pros and cons of each investment avenue.

Let’s take a look at some of the attractive ones:

  • Government Securities:

The bond yield on short term (1-year) government securities (g-secs) is currently approximately 8% to 9% p.a. Due to the inverse relationship between bond prices (carrying fixed interest rates) and interest rates, the current trend of rising interest rates have brought down the prices of bonds and gains thereon. On account of this, the returns on medium-long-term debt funds, including MIP, have been very low over the last year.

Thus, it is advisable for investors to maintain/invest in lower portfolio duration i.e. short-term products (directly in g-secs or through mutual funds in debt mutual funds discussed hereunder) to minimise the impact of rate increases. From a tax standpoint, interest/ short-term capital gains and long-term capital gains from g-secs is taxed at the regular and lower rate of income tax, respectively.

  • Bank Fixed Deposits:

Banks are now offering higher rate of interest say 10.50% on a FD of a year. From a tax standpoint, interest on FD is also taxed at the regular rate of income-tax ranging from 10.30% to 33.99% and subject to tax deduction at source (TDS) provisions.

  • Debt Mutual Fund:

Debt funds are tax-efficient for investment since dividend on debt funds is tax-free (however the debt fund would be liable to pay tax on distributed income [DDT] ranging from 14.1625% to 28.325% depending upon the type of holder and type of debt fund) and long-term capital gain (holding period of more than 12 months) is taxable at the rate of 10.30% (without indexation) or 20.60% (with indexation). For an investor falling in the highest tax bracket of 33.99% planning to park funds in debt funds, for short-term investment (holding period not exceeding 1 year) dividend option and for long-term investment (holding period exceeding 1 year) growth option would be more tax-efficient.

  • Zero Coupon Bonds:

National Bank for Agriculture and Rural Development (Nabard) is issuing ZCB as Bhavishya Nirman Bonds which a 10-year product having issue price of Rs 8,500, face (maturity) value of Rs 20,000 to be listed on the Stock Exchange implying a compounded annualised pre-tax yield of 8.9444%.The table shows that the post-yield is different for each investment and one needs to decide as to invest in which debt instrument considering the pros and cons thereof and which tax bracket one falls in.

Sunday, June 7, 2009

Fiscal & revenue deficit

What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included. Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

What is the difference between fiscal deficit and primary deficit?

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.

What are the views of different experts on fiscal deficit?

Economists differ widely on their views on fiscal deficit. According to John Maynard Keynes, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit. Many economists think that if the deficit is financed by raising debt from the central bank it may lead to an inflationary scenario. Higher fiscal deficit is one of the reasons for the Indian economy to have relatively higher inflation.

What is revenue deficit?

A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue. Let’s take an hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.

What is the current scenario in India?

To revive the economy, the government has announced several stimulus packages. This has led to a hike in the fiscal deficit. The interim budget has also proposed an expenditure of Rs 953,231 crore. The Reserve Bank of India recently said that the fiscal deficit might touch 5.9% against earlier estimates of 2.5%. This turns into a deficit of Rs 3,54,731crore from an initial expectation of Rs 1,50,310 crore. The government is expected to lose Rs 36,074 crore due to a cut in taxes.

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